Comptroller Testifies on House Subprime Lending Bill

WASHINGTON — Comptroller of the Currency John C. Dugan today expressed support for provisions in a House bill that would set national standards for subprime mortgages comparable to federal banking agency standards, and provide enhanced regulation for all mortgage brokers, but expressed concern about some parts of the proposed legislation.

"The OCC supports the establishment of national standards for subprime mortgages, which have been the source of so many recent problems in credit markets," Comptroller Dugan said in testimony before the House Committee on Financial Services. "We also support the bill’s goal of enhanced regulation of all mortgage brokers, whether used by banks or nonbanks.

"The Comptroller noted that the federal banking regulators, reacting to pervasive problems in the subprime market, tightened mortgage standards by issuing guidance on both subprime and nontraditional mortgages.

"But these standards only apply to federally regulated institutions," he said. "They do not address similar practices at state-regulated institutions that are not banks, even though, by nearly all accounts, such institutions engaged in some of the most aggressive mortgage practices."

To be effective, these standards must extend to non-federally regulated institutions to create truly national standards. That could be accomplished through state action, a rulemaking by the Federal Reserve Board or through legislation such as the bill that was the subject of the hearing.

While supporting the goals of national standards, Comptroller Dugan stated his concern over certain provisions of the proposed legislation being considered by the committee that go beyond subprime mortgages.

"In particular, we question whether the burden of licensing and registration requirements for all bank employees involved in any type of mortgage origination is, given existing bank regulation, worth the marginal benefit, especially for community banks," he said. Additionally the Comptroller cautioned that anti-steering provisions in the proposed legislation – which include highly subjective requirements that mortgages be "‘appropriate’ and ‘in the consumer’s interest’ – will be difficult to enforce, and could significantly increase the litigation exposure for all banks."

"In addition," Comptroller Dugan said, "the more stringent underwriting standards for subprime mortgages would by definition restrict the availability of credit to subprime borrowers." On the plus side, that would ensure that borrowers who get loans could afford to repay them. On the negative side, some creditworthy borrowers would be prevented from getting loans.

The Comptroller also said changes are needed to the bill’s enforcement standards to ensure that the proposed standards "are as effectively implemented and enforced at nonbank lenders and brokers as they would be at banks."